rethinking the petrol subsidy

In order to help the low-income class in the current economic climate, the government has decided to offer a subsidy of Rs 100 per litre on gasoline. To pay for the subsidies, it intends to raise prices for wealthy consumers.

This plan will have a two-tier pricing structure. For two- or three-wheelers, there is a monthly cap of 21 litres, and for compact cars with an engine size of 800 cc or less, the cap is 30 litres. The programme will cover almost 20 million registered bikes, rickshaws, and 1.36 million autos, claims Petroleum Minister Musadik Malik.

Despite having a relief plan in place to safeguard the weak, the government still faces several obstacles. So far, two strategies for making the plan work have been discussed. When registering by SMS, the applicant will first receive an OTP (one-time password) that must be presented and confirmed at gas stations along with a computerised national identity card (CNIC). As there will be longer lines at the gas pumps, this can take a lot of time.

In order to redeem their given fuel quota, people will also receive fuel cards. In addition, in order to prevent the development of a black market, the daily restriction for consumers of two- or three-wheelers is 2-3 litres, and for small automobiles, the maximum is 5-7 litres.

Understanding the discounted pricing system is also crucial. According to the petroleum minister, the Oil & Gas Regulatory Authority (OGRA) would set two distinct prices for users with high and low incomes. For instance, low-income customers will pay Rs222 per litre at the current petrol price of Rs272, while high-income customers will pay Rs322 per litre. Technically speaking, the difference between the rich and the poor is Rs 100, or a Rs 50 per litre subsidy. Rich people will, however, be responsible for bearing the entire burden, which may lead to tax evasion and underreporting of assets.

What will happen if the consumption limit surpasses the 21- or 30-liter limits for two- and three-wheelers and 800cc automobiles, respectively? Will they pay the market price or the price established at a higher level for wealthy customers? Once more, nothing is obvious.

The bulk of vehicles with an engine size of 800cc or less are utilised as taxis and business vehicles, and their fuel consumption is significantly higher than that of a typical family vehicle. Every extra litre of consumption over the allotted amount will cost them the full Rs322 per litre. In a month, a compact automobile uses up three 30-liter tanks on average. In this instance,

It will defeat the objective of offering subsidies and burden consumers with an additional Rs. 1,500 in costs.

Moreover, only automobiles with an engine capacity of 800cc or less are eligible for this programme. How about the other middle-class families that have a 1000cc automobile and a monthly salary of Rs 100,000? The middle class will be subject to an exorbitant burden of at least Rs5,000 per month if we assume that these cars utilise 100 litres of fuel on average each month. In addition, because they lack accreditation from the relevant departments, the bulk of loader rickshaws are not registered at excise offices. In Punjab alone, more than 200,000 loader rickshaws are operating illegally and won’t eventually receive any benefits from this programme.

As a result, not only will their purchasing patterns be impacted by an increase in inflation-related disposable income, but the majority of them will also fall below the poverty line. In June 2022, catastrophic floods resulted in the lowering of the poverty line for 71 million individuals.

The story is not over yet. By excluding the usage of 1000cc cars with a market value of Rs0.8 million and allowing owners of 660cc engines and above, this programme will further increase inequality. Also, by increasing the burden on the middle class and the poor, it supports regressive taxes.

Given that it will worsen the already dire circumstances in the nation, this subsidy doesn’t seem appropriate for helping the poor. Conflicts and flash floods in Pakistan are adding gasoline to the flames of the country’s worst socioeconomic catastrophe in history. In February 2023, the country’s inflation rate reached a record high of 31.5% on an annual basis, with food inflation coming in at about 41.9%. Putting pressure on low- and middle-income individuals at these times, when the nation is already dealing with numerous problems, may make their ability to make purchases worse.

In addition, the disclosed plan appears to have angered the International Monetary Fund (IMF). Announcing a subsidy programme without consulting the IMF could further postpone the accord, which would have an adverse impact on the economy at a time when the government is waiting for the staff-level agreement, which has already been delayed by eight months. Pakistan’s foreign exchange reserves can barely fund the needed imports for four weeks. The nation is therefore anticipating the arrival of the first $1.1 billion tranche from the $6.5 billion bailout package agreed upon with the Fund in 2019.

Pakistan has to review the strategy as it can generate more hardship on customers. The income level should serve as the basis for the eligibility requirements rather than the type of vehicle. The government needs to create a baseline for the eligible community based on the prevailing market conditions.

In the past, relief programmes like “sasti roti” fell short of their goal. Instead of short-term plans, we now need to concentrate more on long-term solutions. By expanding the tax base and instituting a progressive taxation scheme, the tax system can be made better. The government should place more of its attention on targeted subsidies for financial transfers through mobile wallets and bank accounts rather than just introducing such programmes.

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